MarketWatch

Apr 1, 2002

Irrational Policies, High Interest
Rates

Interest rates in many Latin American countries are very
high, both in nominal and real terms. Rates in Argentina, of
course, as it struggles to defend its currency and reconstitute
monetary policy, are all over the place. Collapse in confidence
in the peso is so complete that interest rates at any level are
unlikely to revive the currency for long. Brazil's
semi-independent Central Bank has begun easing rates after
moving them up over a year ago to 19%. With inflation forecast
at about 4% this year, base interest rates are 14% in real
terms, a rate so high that few legitimate businesses can raise
long term financing. The central bank argues that rational
fiscal policies and tight monetary policy will eventually
deliver exchange rate and consumer price stability needed to
fuel sustainable growth. That has happened in Latin America's
two economic star performers, Mexico...